Competitor Based Pricing | Pro & Con |

Key Takeaways

• Competitor-based pricing may prevent companies from taking advantage of customers’ willingness to pay more for certain features or services.
• Missed potential revenue can result from competitor-based pricing.
• Setting prices too low can lead to unprofitability.
• Competitor-based pricing limits a company’s ability to differentiate itself from competitors.

What is competition-based pricing?

Competition-based pricing is a pricing strategy that involves examining the offerings and prices of competitors in order to strategically position a product in the market. This pricing strategy is most commonly seen in B2C commerce, where products compete for wallet share. Online retailers and marketplaces provide multiple options and information on assortment and pricing to help shoppers select the best product for their needs.

This includes considering product design and marketing decisions, as well as targeting niches with low competition and creating products to compete with specific competitors. The advantages of competition-based pricing include the ability to assess the competition accurately, identify gaps in the market, and position products to gain a competitive advantage.

Additionally, this strategy can help companies create pricing that is attractive to consumers and maximize profits. On the other hand, competition-based pricing can also lead to price wars, lower profits, and fewer opportunities to innovate. Overall, competition-based pricing is a popular pricing strategy and can be beneficial for businesses in the right circumstances.

However, it is important to consider the risks associated with this strategy before implementing it. Companies need to be aware of the competitive landscape and plan accordingly to ensure they remain competitive in the market.

Examples of competitor-based pricing strategies

Competition-based pricing is a strategy often employed by businesses to gain market share and increase their profits. It refers to setting prices based on the prices of competing products or services.

Three common strategies include pricing below competitors, price matching competitors, and pricing above competitors.

Each strategy has its own advantages and disadvantages and should be chosen carefully based on the company’s objectives, the market, and the competition.

PRICE BELOW COMPETITOR PRICES

Adopting a pricing strategy of setting prices below competitor prices can potentially result in increased sales and long-term profitability. Loss leaders are a pricing strategy where a product is sold at a discount resulting in a loss, and Sony uses this strategy with their game consoles by selling them at a loss upon release.

The strategy of setting prices below competitor prices has several pros and cons:

Pros:

• Can increase sales and market share
• Can attract new customers
• Can increase long-term profits

Cons:

• Can lead to price wars
• Can hurt margins and profitability
• Can lead to customers viewing your products as lower quality

PRICE MATCH COMPETITORS

Setting prices to match those of competitors can result in a heated market response. The practice is generally beneficial to customers, since they are able to purchase the same items at a lower price.

Businesses are also able to increase their sales through this strategy, as customers may be more encouraged to buy from them if their prices are lower than their competitors.

On the other hand, the Amazon pricing model has made price matching less popular in recent years. This is largely due to the fact that Amazon’s prices are often lower than most competitors, thus making it difficult to effectively match their prices.

Furthermore, if a business sets prices too low, they may end up losing profit due to the cost of competing with Amazon’s lower prices.

As such, businesses must be aware of the potential risks and rewards associated with price matching.

PRICE ABOVE COMPETITOR PRICES

Charging prices that are higher than those of competitors can have both potential benefits and drawbacks for businesses. Premium pricing is a popular pricing strategy that requires a premium product that is seen as superior to competitors’ offerings. Adopting a premium pricing strategy can help businesses to differentiate their product from its competitors, thus allowing them to command a higher price. This can help to increase profits and also allow businesses to target customers that are willing to pay for a higher quality product.

However, there are also potential drawbacks to charging prices higher than those of competitors. Customers may be unwilling or unable to pay the higher prices, which can lead to a decrease in sales. Additionally, if competitors are charging significantly lower prices, customers may be more inclined to purchase from them. Therefore, businesses must carefully consider the potential benefits and drawbacks of charging prices higher than those of competitors.

How to build a competitor-based pricing strategy

Developing a strategic competitor-based pricing strategy requires an in-depth analysis of the competitive landscape and customer preferences.

This analysis should include an assessment of the value proposition offered by competitors, their pricing strategies, and their operational efficiency.

Additionally, customer preferences should be identified to ensure that pricing strategies are tailored to the target market. This will enable businesses to create more value or operational efficiency through their pricing strategies, while staying competitive in the market.

Pricing decisions should also be made with the goal of protecting against retaliation from competitors. To achieve this, businesses should focus on providing the best deals to customers while avoiding pricing products too high.

Additionally, they should understand customer preferences and engage in active social listening to stay in the know and anticipate competitor moves.

By creating value or operational efficiency through their pricing strategies, businesses can remain competitive without having to fear customer churn by pricing too high.

Pro of competition-based pricing

Adopting a strategy of competition-based pricing can bring a multitude of benefits for businesses, including providing a solid base for pricing decisions, being easy to calculate and understand, reducing risk and surprises for customers, and allowing for adjustments based on market trends.

By using data from competitors, businesses can make informed decisions about their own pricing and adjust it as needed. This type of pricing strategy can also provide businesses with a better understanding of their competitive environment, allowing them to better position themselves in the marketplace and make informed decisions that will benefit their bottom line.

Competition-based pricing also helps to ensure that customers are not surprised by sudden price changes and that businesses are able to remain competitive in their respective markets. Customers appreciate the stability of knowing that their prices will not spike unexpectedly and that there is a fair and competitive market in which companies are competing.

This type of pricing strategy also allows businesses to better understand customer demand, enabling them to adjust their pricing as needed to generate more sales and revenue.

In addition, competition-based pricing allows businesses to make dynamic changes to their pricing strategy as market trends and conditions change. This allows businesses to remain competitive and capitalize on market opportunities. Furthermore, it helps businesses to determine the optimal pricing structure for their products and services, allowing them to maximize their profits while still providing customers with fair and competitive rates.

Con of competition-based pricing

Analyzing competition-based pricing strategies often ignores important aspects of pricing, such as consumer demand, production costs, and feature differentiation. These omissions can have a major impact on the profitability of a product or service. For example, when relying on competitors’ pricing, a company may not be able to take advantage of customers’ willingness to pay more for certain features or services. This means that a company may be missing out on potential revenue that could have been generated if the pricing had taken into account the value of the product or service.

Furthermore, competition-based pricing does not offer insight into the cost of production. Without taking into account the direct costs of production, a company risks setting prices that are too low to be profitable. Additionally, competition-based pricing does not consider how customers will respond to different pricing strategies, leaving a business unable to predict long-term impacts on their profit margins.

Finally, competition-based pricing can limit a company’s ability to differentiate itself from its competitors. By setting prices based on what the market is already doing, a company may be unable to capitalize on unique features or services that it offers. This could lead to lost market share, as customers may not be aware of the differentiating features or services offered by the company.

Alternative

Exploring alternative pricing strategies can provide businesses with an alternative approach to pricing their products and services.

Cost-plus pricing, for example, is a popular option in which a business considers its production cost and adds a profit margin. It is an easy-to-implement strategy that allows the business to set prices without having to consider the actions of competitors.

Demand-based pricing, on the other hand, sets prices based on the market demand, while value-based pricing is reliant on what customers are willing to pay. These strategies can be used to gain an advantage over competitors, as they are not directly linked to competitor prices.

Businesses should determine their goals when considering alternative pricing strategies. It is important to understand the market conditions and customer preferences in order to develop an effective pricing plan.

A competitive analysis should be performed to identify the competitive landscape and understand the pricing strategies used by competitors. This will allow businesses to understand how their prices compare to competitors so that they can set prices accordingly.

It is also important for businesses to be aware of trends and customer behavior when considering an alternative pricing strategy. Companies should be responsive to changes in the market and anticipate customer actions in order to stay competitive.

By taking these factors into account and understanding customer preferences, businesses can build a pricing strategy that will maximize their profits.

Conclusion

Competition-based pricing is a pricing strategy used to take advantage of market conditions by basing prices on competitors’ prices, products, and services. It can be an effective tool to gain market share, increase profits, and enhance customer loyalty.

However, it can also lead to price wars, low quality products, and a lack of innovation. Employing a good pricing strategy requires careful consideration of a company’s competitors, customers, and products. It is important to carefully weigh the pros and cons before deciding to use a competitor-based pricing strategy.

Companies should also consider alternative pricing strategies, such as product bundling or value-based pricing, to ensure maximum profitability. Ultimately, reaching and maintaining a competitive price point is essential to success in any market.